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2021.08.22 Penn Wealth Report Vol 9 Issue 03

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6 penn wealth Report volume 9 issue 03 22 aug 2021 Copyright 2021. All Rights Reserved. strategic vision Western Civilization Tulip Mania: Arguably the West's First True Financial Bubble Four hundred years ago a tulip trading frenzy gripped Holland; since that event, one aspect remains unchanged: human nature. In the late 16th and early 17th centuries, the Dutch Republic—of which Holland was a part—dominated world trade, boasting the largest fleet of merchant ves- sels in existence. ese merchantmen brought new and exotic products from far-off regions back home to the wealthy members of the Dutch upper class; for- merly unheard of items such as potatoes, peppers, and tomatoes. In addition to these future staples of the European dinner table, the Sultan of Turkey delivered a quite unique item to the citizens of Vienna in 1554: the first tulip bulbs and seeds had hit European shores. When tulips made their way to Holland in 1593, these notoriously finicky plants were placed under the care and supervision of a group of professional cul- tivators. Due to their rarity and beauty, they quickly became an obligatory mainstay in the gardens of the region's rich and famous—a status symbol of the elite. Human nature being what it has always been, the masses of the middle class, primarily merchants, became obsessed with owning tulip bulbs, both for their own egos and as a profit center. ese plants were so unique, and their varieties so diverse, that members of every class of Dutch society wanted in on the action. Tulip mania grips—and then torches—a society By 1634, tulip mania was sweeping through the region. Bulbs of the more rare varieties of the plant were suddenly selling for as much as six times the average citizen's salary. In one case, a thriving brewery was traded for one bulb of the Tulipe Brasserie variety. ose without the guilders to pay outright for bulbs began to barter their homes for a piece of the action; others were allowed to buy using an early form of the margin loan—with the principal and interest to be paid back using the profit from the subsequent sale of the bulbs. When the speculation became so fevered that ordi- nary citizens could not afford even the most common of bulbs, the nightmarish hangover began. By early 1637, prices began to dive and owners were forced to sell their prized possessions to pay off their debts. While there are wild stories of some tulip bulbs reach- ing 10,000 guilders in price, it is reasonably certain that bulbs selling for around 200 guilders in late 1636 were suddenly being liquidated for something more like ten guilders—a 95% drop in value. For those who bet the farm—often quite literally— on the rich promises that came with trading tulip bulbs, their financial futures were in shambles. While the nation's economy remained relatively unscathed, the lives of those in an extensive number of individual families were deeply affected. Many spent the rest of their lives trying to pay off the debt they incurred from the foray. ere are so many timeless lessons to be gleaned from the bubble that was tulip mania. Financial engineering has come a long way over the past four hundred years, devising all types of new schemes, but human nature hasn't changed a bit; and that is an explosive mix. e same cause and effect, the same greed and fear, that existed in 17th century Holland surges through today's markets. When people hear about others hit- ting it big in this scheme or that, it is natural for them to want a piece of the action. While it is now easier than ever for ordinary citizens to take part in complex trades once limited to the elite, it is critical to live by the creed "caveat emptor," let the buyer beware. Trade flourished within the Dutch Republic in the 1500s; image licensed

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